Title: A decision model to predict profitability using revised Thompson–Thrall profit ratios in DEA with an application to South Asian banks

Authors: P. Sunil Dharmapala, Piyadasa Edirisuriya

Addresses: Department of Operations Management and Business Statistics, College of Commerce and Economics, Sultan Qaboos University, P.O. Box 20, Al-Khoud 123, Muscat, Oman. ' Department of Accounting and Finance, Monash University, Melbourne, Australia

Abstract: Many researchers in the past have addressed the issue of profitability of banks from different perspectives using financial ratios and decision models. Thompson et al. (1995) introduced linked-cone (LC) profit ratios with assurance regions (AR) in data envelopment analysis. In this paper, we revise LC–AR and show a contrast between Thompson–Thrall’s and revised profit ratios. We propose a decision model to classify banks as profit-makers, loss-makers or neither, when ‘market prices’ that form AR are not available and hence LC–AR profit ratios do not exist. We demonstrate how this method works for a set of South Asian banks.

Keywords: Malmquist DEA; data envelopment analysis; assurance regions; linked-cone; profitability; profit ratios; efficiency; Robert Thrall; Gerald Thompson; financial ratios; decision models; banks; banking; profit-makers; loss-makers; market prices; South Asia; operational research.

DOI: 10.1504/IJOR.2011.043550

International Journal of Operational Research, 2011 Vol.12 No.4, pp.407 - 429

Published online: 14 Feb 2015 *

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